CITY HIGHLIGHT, MAY 2007

ATLANTA CITY HIGHLIGHTS
Mike Neal, Marc Robinson, James Ledbetter Jr., and Korey Prefontaine

Atlanta Retail Market

Atlanta’s retail development momentum was expected to slow in 2006, but it has shown no sign of a downturn. Occupancy rates and rental rates differ from submarket to submarket, but a clear trend is emerging as urban growth picks up momentum and suburban retail development slows.

From first quarter 2006 to first quarter 2007, the central business district’s vacancy rate decreased from 9.2 percent to 6.7 percent with rental rates increasing from $22 to $26. Midtown vacancy increased from 7.2 percent to 13 percent while rental rates increased from $20 to $22.50 during the same period. Buckhead had the most interesting changes with vacancy increasing from 4.4 percent to 12 percent and rental rates stabilizing around $23.

Midtown experienced dramatic growth as Edgewood (1.2 million square feet) by Sembler, Atlantic Station (1.2 million square feet) by AIG, and Lindberg (500,000 square feet) by Sembler were fully absorbed by the market. This highlights the extreme residential growth that urban Atlanta is experiencing. The Central Business District (CBD) and Buckhead added only small areas of retail. Buckhead, at 12 percent vacancy, seems poised for Ben Carter & Associates’ high-density development at Peachtree and West Paces Ferry in Buckhead. Sources are quoting 500,000 square feet of retail and restaurant space, four hotels and 70,000 square feet of boutique office space. The project is certain to focus Class A retail on Atlanta and push the upper limits of Atlanta rental rates. Look for a strong activity in Midtown; with the Mid-Town Alliance creating a retail corridor of approximately 2 million square feet along 14 blocks on Peachtree from North Avenue to 14th St. The CBD will have a resurgence with the Allen Plaza District being developed by Barry Real Estate Companies. The competition is on to create Atlanta’s high-end retail district. Buckhead, Midtown, and the CBD are to be watch closely in 2007.

The central growth corridor of Atlanta has traditionally followed Highway 400 from Perimeter Mall/Sandy Springs to Cumming. Current occupancy rate of the Sandy Springs market has dropped from 8.8 percent to 8 percent with rental rates remaining stable around $20.50 range. Sembler’s Perimeter Mall project is fully leased well above those rental levels. Additionally, Sembler’s Target-anchored project at I-285 and Roswell Road is pre-leasing well and pushing the rental rates up to the Buckheal level as well. The most interesting project along 400 is Prospect Park by Forum Development in a joint venture with Thomas Enterprises and Barry Real Estate Companies. The North Fulton market vacancy rate has risen from 9.4 percent to 10.5 percent with rental rates holding at $20. North Fulton is the highest growth market for income as well as population in Metro Atlanta. While Forum is not announcing its current tenant commitments, sources close to the project have disclosed that numerous tenants normally associated with Lenox Mall and Phipps have committed. The competition will increase, as Simon is soon to announce development plans for Atlanta’s newest mall at the west quadrants of McFarland and 400. Development in the Alpharetta trade area has been the strongest in metro Atlanta and will continue but will fall second to Midtown activity.

The most complicated markets to understand and predict are in the long-awaited Northern Arc. Planned to connect the northwest Cherokee and northeast Cumming markets, the corridor is essentially Highway 20 from the west, intersecting highway 369 as it enters Forsyth County. Cumming has experienced rapid growth at Highways 20 and 400 — beyond expectations and supporting residential density. Cumming vacancy has increased from 9.8 percent to 13.8 percent with rental rates dropping from $18.50 to $16.50. Development in Cherokee has been slow due to infrastructure problems with sewer and road improvements. Vacancy rates have increased from 11.7 percent to 17 percent, and rental rates remain at $19.50. Sembler is breaking ground at I-575 and Highway 20 with a 1.2 million-square-foot shopping center anchored by Target, Lowe’s, and Kohl’s.

Counties with vacancy over the 20 percent level include Coweta, Paulding, Spalding, Hall, and Clayton; Douglasville also has a vacancy rate over 20 percent. Rental rates in these counties range from $7 to $17.

The one contributing factor most evident in the more successful retail trade areas is job growth. Most economists predicted a decline in Atlanta’s job growth related to Delta, BellSouth, Ford and General Motors. However, recent studies have noted that Atlanta’s job growth has increased to 890,000 since 2000. The most evident trend has been a sharp decline in housing market trends in the suburban Atlanta’s MSA, and dramatic increases of housing development in the urban core of Atlanta. Given that Atlanta now the longest average commute in the nation, this trend can only continue. “Densification” will continue to be Atlanta’s buzzword for the foreseeable future.

— Mike Neal is a senior vice president with CB Richard Ellis’ Atlanta Retail Services group.

Atlanta Multifamily Market

Despite a local economy that has faced more uncertainty than any other period during the last 10 years, the Atlanta apartment market continues its recovery and shows signs that indicate a very healthy 2007.

During the last 2 years, the resiliency of the Atlanta economy has been tested, with several of Atlanta’s largest employers facing tremendous uncertainty. The bankruptcy and subsequent hostile takeover attempt of Delta Airlines, the relocation of the Bellsouth/AT&T corporate headquarters to San Antonio, and the takeover of Georgia Pacific by privately-held, Kansas-based Koch Industries have been major economic events causing significant uncertainty. Regardless, Metro Atlanta has responded very well and the diverse economy is very stable and growing.

The multifamily sector is very active on all fronts, driven primarily by the tremendous liquidity in the market. This liquidity has made the cost of capital (both debt and equity) very inexpensive for owners and developers. As a result, transaction volume of multifamily sales is at a record high and development activity of new rental communities is robust. Additionally, the recent meltdown in the sub-prime lending market is having a favorable impact on the rental market by driving many potential homebuyers back to rental communities.

The two most active development trends in the Atlanta apartment market are infill and mixed-use projects. Developers are responding to a strong demand for intown, urban living with dense projects located in infill areas, often on very challenging sites or sites that are being redeveloped from other uses. Additionally, the success of mixed-use developments in the Atlanta area has made the multifamily component of these projects extremely desirable. Developers are willing to pay a premium price for land within these projects due to the premium rents. Developers are also continuing to raise the standards for new apartments. Many new apartment communities are being designed with condo-quality appointments. Loft style design and open-floor plans as well as interiors finished with granite countertops and stainless steel appliances are becoming the norm. Another noticeable trend in the construction of new multifamily communities is the move to a four-story, stick-built building wrapped around a parking deck.  

Sales of existing apartment communities have been extremely active for the last 2 years, and 2007 looks to be another very active year. The most active segment of the market, in terms of transactions and sales volume, are the Class A & B assets. These properties are in high demand, driven largely by institutions looking to place large amounts of capital. In addition, many local, regional and national investment groups have raised substantial investment funds and are aggressively looking to place the equity. Cap Rates for Class A & B properties are around 5 percent and 6 percent, respectively. The C and D class markets have also been very active, but driven by different factors. Distress has been the theme for the last several years in the C and D class markets with significant foreclosure activity. Sales of these lender owned properties is at its highest level since the early 1990s, but this activity is beginning to decline.  

Overall, the Atlanta apartment market is healthy and balanced. The economy is growing and interest rates remain low. Any uptick in interest rates is likely to help strengthen the multifamily market, which makes Atlanta healthy in the near and long term.

—Marc Robinson is with Atlanta-based Southeast Apartment Advisors.

Atlanta Office Market

Recognized as the economic engine of the Southeast, Atlanta continues to grow and is now considered one of the world’s top business centers. According to the U.S. Census Bureau’s most recent city rankings, Atlanta led the nation in adding new residents — approximately 890,000 from 2000 to 2006. Ranked only behind New York and Houston for the number of Fortune 500 headquarters, Atlanta is also a location of choice for mid-sized companies and entrepreneurial start-ups.

During the last year, some of Atlanta’s most prominent trophy office buildings have sold at record prices as investors continue to take advantage of interest rates and well-below replacement costs. New York real estate giant Tishman Speyer entered the Atlanta marketplace buying Trizec’s entire 3.5 million-square-foot Atlanta portfolio.

Atlanta’s overall vacancy rate dropped below 20 percent, for the first time in four years. Average rents rose to just above $20 per square foot and are now the highest Atlanta has seen in more than 3 years. Concessions are tightening, but are still present in Atlanta’s Class A space, with landlords offering little incentive in terms of free rent or allowances — typically a half to 1 month free per year of lease term. Concessions were double that amount two years ago. At 2.4 million square feet, the amount of sublease space is the lowest it’s been since the last cycle.

There is 2.8 million square feet of new construction underway – the highest level in more than 3 years – that is driven by strong demand. With more than 50,000 new jobs expected to materialize in the metro area this year, leasing demand is expected to sustain new development. The investment market drove much of the development activity the last 2 years, and is expected to continue in 2007. The mantra seems to be “build now before construction costs get out of sight” and is also pushing new development projects.

There is a great deal of quality projects underway to be excited about and it is difficult to pick just one. Developers such as Barry, Cousins, Forum, and Ben Carter all have developments under construction throughout the city. The growing trend that is most exciting is in-town housing and the positive effects it is having on the city and other areas.

Buckhead and Midtown still remain the city’s hottest submarkets and these two 24/7 markets continue to pace each other with numerous projects on the drawing boards. Keep an eye on the suburban submarkets of North Fulton, the Central Perimeter and the Northwest. These submarkets have developments underway like Prospect Park in Alpharetta and Cobb County’s performing arts center. In the Central Perimeter, more than 1 million square feet of office product has been demolished to make way for new retail and residential. This fact, along with the lack of speculative development, bodes well for this submarket.

The forecast for 2007 should continue to see a tightening market with continued absorption gains, declining vacancies and availabilities, and a continued increase in rental rates and construction costs.

Uncertainty caused by high energy prices, the recent BellSouth acquisition by AT&T, local auto industry plant closings of GM and Ford, and high construction costs (25 percent higher than 3 years ago) could put a damper on Atlanta’s economy for 2007. However, Atlanta’s fundamentals leave it poised to grow its way toward the next cycle high point as investors will continue to view Atlanta as a growth market, with out-of-state capital expected to drive velocity as cap rates are forecast to remain in the high 7 percent range.

— James E. Ledbetter, Jr.  is president, Southeast Region, in the Atlanta office of Transwestern.

Atlanta Industrial Market

Home to three major interstates, the nearby Port of Savannah and Hartsfield-Jackson Atlanta International Airport—the world’s biggest and busiest airport—Atlanta has much to offer industrial tenants. As it balances a surge of new industrial space that was delivered last year, Atlanta represents a superior range of options for industrial tenants and investors who are looking for quality product.

In the last 12 months, developers built nearly 21 million square feet of new Atlanta industrial space. This represents a significant increase from any of the previous 4 years, when there was never more than 10 million square feet of industrial space delivered in a calendar year. At least 9 million square feet of this new construction was delivered almost equally among three active Atlanta-based developers: Seefried Properties, McDonald Development and Pattillo Construction, which is the largest private industrial developer in the Southeast.

Because this new construction was based on a growing demand among big national tenants, it seems to have had no impact on the performance of the industrial real estate sector. In fact, in the past year, industrial vacancy rates remained consistent in the low- to mid-11 percent range, reflecting one of the lowest vacancy rates among all of Atlanta’s commercial real estate product types. Rents for industrial space also have held steady at an average $4.20 per square foot, though industrial rents have hit $7.75 per square foot in the north central submarket, where there is a more limited inventory of industrial product and where buildings are among a nicer amenity base and closer to the homes of executive decision makers. More affordable submarkets, which sit farther from executive housing and where industrial space is in greater supply, include I-20/West Fulton and south Atlanta. Rents in these areas average $3.20 per square foot.

Most new development activity is occurring in northeast Atlanta and the I-20/West Fulton area. Both of these submarkets offer reasonably priced land and easy access to one of Atlanta’s three major Interstates: I-20, I-75 and I-85.  In terms of size, the largest of Atlanta’s most recent industrial projects include the nearly 1.3 million-square-foot SouthPort Logistics Center in south Atlanta, which is occupied by Kimberly-Clark Corporation, and a 1.3 million-square-foot facility in the I-20 east industrial submarket, which was built for Highland Park, Ill.-based Solo Cup.

The existence of these very large projects—as well as a decline in cap rates from the mid-8 percent range approximately 1 year ago to the high 7 percent range today—keeps Atlanta on the radar of not only big companies but also of big investors. National REITs and large local commercial real estate investment groups are very active in the marketplace. When they find a quality, well-occupied building, they tend to buy and hold.

As construction activity slows this year, which in turn should keep vacancy and rental rates steady, interest among investors is expected to continue. The same is expected to be true among tenants looking to lease or expand in the area. For those looking to enter the market, now may be a very good time, as industrial space—and therefore options—are plentiful.

— Korey A. Prefontaine is an advisor with Sperry Van Ness in Atlanta.


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